What’s my cut? A co-brokering tip sheet

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The first question from residential brokers co-brokering a commercial deal is often ‘what’s my split?’ writes, Steve Fabian. Well, here’s the answer

Last issue, I began a discussion on commercial mortgages with the idea of creating a commercial-specific designation.   I want to thank you for the debate that has gone on since.

As we continue the discussion on commercial mortgage brokering, I want to tackle a surprisingly ubiquitous question, regardless of the originating broker’s location, deal type or even experience level. That question, of course, is one of fees.  To be correct the first question is typically”what’s the split” and then “what will the total fee be.” 

Without a doubt, we are all interested in making a living, as such, we need to understand our share of fees, commission, etc.  The trouble is that far too often a deal lays dormant because someone is worried about fees and their split too early in the discussion.   To best tackle this quandary, I think it is important to first understand what is “typical” in terms of fees” and what is a realistic split for the originating broker’s level of co-brokering. I also think it’s important to establish who exactly owns the client.

To be clear, with a few exceptions such as First National, Home Trust and Equitable Trust, commercial lenders do not pay any sort of fee split or commission to brokers.  None pay basis points for commercial transactions.  Thus in order to make an income on a commercial transaction, the broker must charge a fee. 

Typically, fees can run anywhere from 0.5 per cent up to 2 per cent or even 3 per cent.  This is generally driven by deal size and complexity.  Naturally as commercial transactions are generally of a higher dollar amount, the potential fees generated can be quite high.  Herein lies what I believe is the root of the problem:  the potential for fees in the tens and even sometimes hundreds of thousands can cripple the originator with myopic short-term greed, rather than focussing on the deal and client. 

The split
So, what is a proper fee split for co-brokered a deal?   Having discussed co-brokering with several industry veterans, many suggest that 25 per cent of the fee for a referral seems to be their standard. 

The split can be higher if the originating broker is more actively involved in the deal for a practical reason such as language or distance due to geography.  It seems that too often the originating broker expects 50 per cent of the fee when most of the work will be done by the commercial specialist. 

It is best to get a deal done and earn 25 per cent of a fee than to get hung up on split or, worst yet, fumble the deal due to inexperience.  The originating broker needs to recognize that a commercial transaction requires a great deal of time and, depending on deal type, some specialized skills in order to get it done.  

In fact, 25 per cent is fair in a majority of cases, a bit light when the originator is more heavily involved and in some cases 25 per cent is even too much. 
There is often a second part to this problem: fear of losing “client ownership.” 

Who owns the client
While it may seem counter-intuitive to many sales people, especially when the commercial deal presents a large number, the earlier a commercial specialist is engaged and the client handed off, the easier the deal will flow. 

Too often a clear picture of the deal and the borrower’s full information is muddied by the fear of losing ownership of that client. If you are the residential agent who has a commercial lead and you have decided to co-broker, you should only do so with a broker and/or brokerage you trust. 

When co-brokering, my brokerage will sign an agreement with you, and, with professional integrity at the forefront, I can say with confidence that the client will always be yours.  I urge students in the REMIC commercial brokering courses I teach, to wrap their heads around this important aspect very early on and pass on the client. 

Of course they can and should gather some basic information upfront in order to begin the conversation with the client and the commercial broker, but the sooner the hand off, the better.  I have unfortunately seen and been involved in deals where the originator insisted on being the middleperson, and without fail those deals were slow to move forward and then almost always died. Simply put, the information did not flow or was misinterpreted. 

Those that oppose or at least are reluctant to co-broker will often mistakenly take the position that they should insist on a minimum split to their favour, the thought process often being that they found the deal and lead generation is key. 

That might be true, but a lead that goes nowhere pays nothing; 20 per cent to 25 per cent of something is much better than 50 per cent of $0.00.  Some might say this view is simplistic or self servicing, that couldn’t be more wrong.  Just as I refer the residential deals that come our way because they require relationships with lenders, systems and volume levels to get the best deal, so is it true that commercial transaction require specialized systems  and skills, lender relationships and most importantly hard work and time. 

Please remember that commercial transaction can often consume an abundance of time.  This needs to be accounted for when discussing fee splits.

One final question that is often asked is “What happens when an upfront deposit is taken on a deal and then a deal dies?”  Depending on the amount, these are generally returned; in the odd circumstance where they are not, it would not be typical for the originator to expect to be compensated for that. 

The commercial broker’s preparation of a proper submission requires time and paid resources such as use of databases and legal forms, which all incur expenses. 

It falls to the residential broker ask all these questions upfront and to understand the commercial specialists’ MO. That means asking about the skills and resources that specialist will utilize.  If the residential broker is uncomfortable with the answers they get, they should find another to co-broker with.  But, remember, the questions, themselves, should be driven by the desire to get the deal done, not get the greatest split.  As is often said, you get what you pay for. 

About the writer: Toronto-based Steve Fabian is principal broker and VP of mortgage investments for Downing Street Financial Inc. He is also one of the 2012 CMP Top 10 Commercial Brokers and holds faculty positions at both Seneca College and the Real Estate and Mortgage Institute of Canada (REMIC).
 

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